Today’s businesses automatically collect and generate immense amounts of data. There is so much data, in fact, that using all of it to examine your performance can lead to data overload. That’s where KPIs come in. Key performance indicators, or KPIs, help you sift and organize your data, equip you with actionable information, and define the business metrics that matter most to your company’s long-term success.
What Are KPIs and Why Do They Matter?
KPIs are the specific, quantifiable measurements you use to evaluate your company’s performance. Because they are tied to distinct business goals or objectives, KPIs allow you to track your progress and measure the success of your operational or strategic decisions.
KPIs fall into two main types: leading indicators and lagging indicators.
- Leading indicators give insight into future performance and conditions. Examples include expansion into new markets, sales pipeline growth and customer lifetime value. Leading indicators are particularly effective when used in a strategic planning process or within a risk management framework.
- Lagging indicators provide insight into past performance or events. Examples of lagging indicators include monthly, quarterly or annual revenue, customer churn rate and customer retention. Lagging indicators help you assess the results of past decisions and strategies.
KPIs give you the data you need to decide whether to continue or course correct as you test strategies and processes. They also provide a trackable measure of progress to communicate both your targets and the actions needed to achieve them.
By clearly defining your business metrics with KPIs, you can align your entire team toward your strategic goals. The right KPIs can help you chart a more profitable trajectory for your company, generate higher performance levels and establish long-term goals that will lead to continued success.
5 Questions To Help You Define Your Business Metrics and Build KPIs
In today’s data-rich business landscape, it’s possible to track too many metrics. Your KPIs need to be tailored to your business goals, needs and processes to be effective. These five questions can help you create the most appropriate and advantageous KPIs for your business.
1. What Is Your Goal?
First, determine the strategic business objective you want to measure. For instance, consider a mid-sized SaaS company. While the company is financially stable, its growth is plateauing, so increasing revenue is a sensible goal.
2. Who Is Responsible for Meeting That Goal?
Once the goal—in this case, revenue growth—has been decided, you must discuss and assign accountability across your teams. Each team will identify specific KPIs that align their actions with this overarching goal. The marketing team will take ownership of lead generation KPIs, for example, while the sales team will oversee conversion rate KPIs.
3. What Is Your Target?
Use the SMART approach to turn a broad goal into a realistic target. SMART goals are Specific, Measurable, Achievable, Relevant and Time-bound. In the example above, the goal is to increase the revenue of your mid-size SaaS company. Once you’ve assessed market conditions and the performance of your industry peers, a SMART target might be to produce a 5% increase in gross revenue within one year.
4. How Will You Measure KPIs?
How you measure your KPIs is determined by their function and form. KPIs can be quantitative or qualitative. A quantitative KPI is a strictly numerical result, such as the number of click-throughs on a page or appointments booked per day. A qualitative KPI measures distinguishing characteristics or features and feelings associated with them, such as data gleaned from a customer satisfaction survey.
You’ll also need a KPI dashboard to aggregate the data you collect and visualize, track and share your performance results.
5. What Is Your Time Frame?
Once you decide on your KPIs, you’ll need to review them at set intervals. The exact timeline will vary according to which qualitative or quantitative characteristics you want to measure. For example, you might measure the number of new clients acquired monthly, but client satisfaction surveys quarterly. The timing will depend on your stakeholder input, business needs and processes.
Potential KPIs for Your Business
Every team and function can set and share KPIs to measure operational progress. Here are some of the common KPIs recommended for your different teams:
KPIs for the Finance Department
- Gross and net margin
- Debt-to-equity ratio
- Working capital ratio
- ROI on investments
- AP and AR turnover
KPIs for the Sales Team
- Customer acquisition rate
- Average deal size
- Overall sales by week/month/year
- Customer lifetime value
- Customer attrition rate
- Sales pipeline growth
KPIs for the Marketing Department
- Cost per customer acquisition
- Return on ad spend
- Customer conversion rates
- Website traffic growth
- Customer satisfaction responses
KPIs for Operations
- Inventory turnover rate
- Time to delivery
- Order accuracy
- Sell-through rate
- Customer retention
- Employee satisfaction responses
Your KPIs should reflect your most pressing business needs. For instance, the SaaS company looking to grow revenue might prioritize KPIs related to customer acquisition and conversion, gross and net margins, and average deal size.
Not All KPIs Are Created Equal
It may sound counterintuitive, but having too many KPIs can be worse than not having enough. Too many KPIs dilute your focus and obscure your ultimate goal. Remember, KPIs are target-specific. Five to seven KPIs per target is a good limit. Sticking to this limit will help you avoid tracking less useful data, like vanity metrics.
Be Wary of Vanity Metrics
Vanity metrics make your company look good but don’t actually help you progress toward your goals. Consider the SaaS company again. Let’s say the marketing team decides to track the number of followers on a social media channel or the number of likes on a social media post. These would technically be vanity metrics. Heartening as it may be to see these numbers climb, they don’t actually track progress toward your ultimate goal of increasing revenue. While it’s still worthwhile to measure how your business is engaging your audience in these channels, vanity metrics like these should not be part of your KPIs.
KPIs measure both achievements and any lack thereof, allowing for course correction. Review your KPIs regularly and adapt them as your business needs evolve. Above all, maintain your data quality—your KPIs are only as good as the data you collect.
Effective KPIs Drive Tangible Results
Paro’s network of top finance professionals can help you create KPIs tailored to your business needs and goals. Our highly qualified experts understand how to design and implement effective KPI dashboards so you can visualize and communicate your results. Leverage our experts to improve your business performance and empower your team with data-based, actionable insights.
